Incoterms
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To facilitate commerce around the world, the International Chamber of Commerce (ICC) publishes a set of Incoterms, officially known as international commercial terms. Globally recognized, Incoterms prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers.Parties involved in domestic and international trade commonly use Incoterms as a kind of shorthand to help understand one another and the exact terms of their business arrangements. Some Incoterms apply to any means of transportation, while others apply strictly to transportation across water.
Definition
Incoterms, short for International Commercial Terms, are a set of international trade terms published by the International Chamber of Commerce (ICC). These terms are globally recognized and help prevent confusion in foreign trade contracts by clarifying the responsibilities of buyers and sellers.
Origin
Incoterms were first published by the ICC in 1936 to provide a standardized language and framework for international trade. As global trade became more complex, these terms have been revised multiple times to adapt to the changing business environment, with the latest revision in 2020.
Categories and Features
Incoterms are divided into terms applicable to any mode of transport and those applicable only to sea transport. The former includes terms like EXW (Ex Works) and FCA (Free Carrier), while the latter includes FAS (Free Alongside Ship) and FOB (Free On Board). Each term specifies the exact responsibilities of buyers and sellers regarding transport, insurance, liability, and costs.
Case Studies
Case 1: A U.S. company entered into a contract with a German company under CIF (Cost, Insurance, and Freight) terms. Under CIF, the U.S. company is responsible for paying for transport and insurance until the goods reach the German port. Case 2: A Chinese company used FOB terms in a transaction with an Australian company. Under FOB, the Chinese company is responsible for loading the goods onto the ship, after which the responsibility and costs transfer to the Australian company.
Common Issues
Common issues investors face when using Incoterms include misunderstandings and misapplications of the terms. For example, failing to correctly understand the division of responsibilities under CIF and FOB can lead to unexpected costs and liabilities. It is advisable to thoroughly study the terms and consult professionals before signing contracts.
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